IB margin requirements

Discussion in 'Options' started by just21, Nov 17, 2009.

  1. just21


    If I am long stocks in an IB margin account I can use the margin loan to sell options on futures. If I just have cash in my margin account can I use more margin than my cash balance?
  2. Why are you talking about long stocks? I think that just confuses things.

    When selling options in IB you need to look at two things. Current Available Funds, and Current Excess Liquidity. These numbers are related to Initial Margin and Maintenance Margin.

    If your Current Available Funds is above zero it allows you to enter a trade. If not then you cannot enter ANY trade. You can only unwind trades.

    Current Excess Liquidity is the amount of money that can be used to support your positions. If the Total (not securities or commodities) goes below zero then IB will start liquidating positions. You want to keep plenty of buffer. Actually IB will send you an email if you are below 10%, and 5%.

    IB uses either RegT, or Portfolio margin depending on the amounts you have in your account. If you have more than 100K you can apply for Portfolio, which is actually better. Though if Portfolio is used incorrectly it just makes it possible to blow up that much quicker.

  3. just21


    If you are long stocks then current available funds would be the same as the stock value because you can borrow against the stock. It just seems that you can take more risk by being long stocks then staying in cash.
  4. Yes and you have found a very interesting loophole.

    Let's say that you sell a bunch of call's. If you are long stock then your portfolio value increases as the margin requirements go up. And if your portfolio falls then your margin requirements go down as your stocks go down.

    Of course to earn a decent return this is not a linear relationship since most likely you will sell more contracts than stock.

    But you are not wrong, and in fact that is what I do. I allocate about 60% to stock, and 60% to option selling, without touching one bit of leverage. By going long stock you get the benefit of dividends, and by being short options you don't have to worry about getting your shares called or having to pay servicing fees.

    It really is a win-win situation.

    THOUGH, manage your risk. Such a construct while easy to talk about requires very very strict risk management. Just yesterday I partially took off a GC option position because I overdid it on the risk. The position was not loosing money, it just was a wrong risk allocation.

    AND such a construct is not a high money maker, but it is a consistent money maker. Thus don't exceed your risk profile!
  5. just21


    Thanks for confirming this. It is interesting for accounts that are long stocks anyway but want to earn an extra return. I agree that it should used sparingly.
  6. Low risk is asure winner.